Ponzi schemes have defrauded Nigerians of over US$1 billion (₦500 billion) in the past decade. The most infamous scheme across Africa, MMM, attracted over three million Nigerian subscribers, who collectively lost about US$50 million (₦18 billion) when it crashed in December 2016. MBA Forex, a homegrown scheme that promised 15% returns, defrauded Nigerians of about US$500 million (₦213 billion) when it folded in 2021. This accounts for nearly 50% of the total funds lost to Ponzi schemes in Nigeria in 10 years.
The Securities and Exchange Commission of Nigeria (SEC) says over 70% of the cases it handles are related to Ponzi schemes. These schemes thrive due to economic hardship, the quest for easy cash and financial illiteracy. Weak regulatory laws and poor enforcement mechanisms further expose Nigerians to various forms of fraudulent schemes that erode local and foreign investor confidence.
Although not the first Ponzi scheme in Nigeria, MMM unveiled the general vulnerabilities of Nigeria’s investment market and ushered in myriad similar peer-to-peer donation schemes. These include Loom Money, Twinkas and others. Most originated outside Nigeria but with the help of local actors. Loom Money was reported globally with names such as ‘Loom Circle’ and ‘Blessing Loom’. In Nigeria, Loom Money operated via Facebook and WhatsApp in 2019, promising 800% returns on investments in 48 hours. It crashed the same year.
Over time, more homegrown schemes emerged, such as Racksterli, Wales Kingdom Capital Limited, Quintessential Investment Company and No Burn Global Limited. Unlike the peer-to-peer schemes, investments were made directly to companies, which offered money-doubling opportunities (without tangible areas of investment) and high returns in days. No Burn Global Limited offered up to 50% returns in seven days. Racksterli, which promised to double investments in less than 45 minutes, was promoted by well-known public figures.
The victims of both peer-to-peer schemes and these shady investment companies are regular employees, schoolchildren and graduates, mostly seeking better lives. In 2017, about 4 000 university students were nearly expelled for diverting their tuition fees of about US$6.5 million into an online Ponzi scheme.
These schemes caught the attention of national authorities, leading to new SEC guidelines from 2017-19 targeting Ponzi schemes, and a few arrests. However, schemers adapt easily to regulatory gaps and local vulnerabilities.
Over the past five years, Ponzi schemes began offering more realistic returns of 15%-50% on a monthly and annual basis. The newer schemes also claimed to offer seemingly tangible investments in areas such as logistics services, agriculture, forex trade and crypto trading. The MBA Forex scheme, which operated from 2018-21, attracted high-paying investors who were willing to invest a minimum of US$1 000 for forex trading.
But the most prevalent homegrown schemes, which affected the most Nigerians between 2019 and 2021, were the so-called agricultural crowdfunding investments. These used the term ‘crowdfunding’, often associated with raising funds from the general public without the obligation of repayment, to obscure their intentions. These schemes offered attractively high interest rates of 15%-50% in three months or annually.
People could invest as little as US$13 (about ₦5 000 as at 2020) for agricultural products including rice, maize, yam and poultry. They enticed educated people with the idea of contributing to national food security and diversifying Nigeria’s economy, which has relied on crude oil yields for so long. They also took advantage of technological advancement, particularly the growth of fintech, which can be used to blur the origin and destination of transactions.
In January 2021, when some agricultural schemes began defaulting on payments, the SEC issued a guideline insisting that crowdfunding schemes be registered within 90 days or cease operations by 30 June 2021. Most of the so-called firms failed to register, defaulted on payments and eventually folded. Most of the managers absconded to other countries where the funds have been laundered.
Some victims told ENACT that their biggest fear was not their lost funds but the security of their private data in the hands of fraudsters. Some of these schemes requested investors’ bank verification numbers, which could be used to further defraud citizens or open bank accounts for fraudulent transactions.
Few of these schemes resulted in successful prosecution. An exception was that of Mariam Suleiman, Chairman and Managing Director of Famzhi Interbiz Ltd, who was recently jailed for five years for about US$5.2 million (₦2 billion) in investment fraud.
Newer schemes disguised as investments in crypto trading are mushrooming parallel to other Ponzi schemes.
A major regulatory gap is that the existing Investment and Securities Act 2007 does not explicitly prohibit Ponzi schemes. Rather, Ponzi schemes are illegal because they are not registered with the SEC. Nigeria’s Parliament passed a new bill last year that expressly proscribed these schemes and increased the minimum jail sentence from five to 10 years. However, the bill is yet to be passed into law.
Banks are implicated in colluding with fraudsters who operate various accounts to disguise funds’ origins. In 2019, the SEC blocked about US$3.1 million (₦1.12 billion) in cash stashed in various bank accounts with pseudonyms and names of relatives of Ponzi schemers. There have been no accountable measures against such banks or their employees, despite calls to probe and expose banks used for Ponzi schemes.
Reports show that much of the illicit proceeds are moved to offshore tax havens. Some funds are also invested in real estate properties in Nigeria. One couple who defrauded investors of about US$60 million (₦22 billion) through their company, Imagine Global Holdings Company Limited, purchased properties in upmarket neighbourhoods across Lagos. These murky real estate transactions involve limited due diligence or ‘know your customer’ measures, making it hard to trace the properties. In 2019, the SEC seized real estate properties worth over US$3.4 million (about ₦1.23 billion).
Even when some funds are recovered, they are remitted to the government, and investors seldom get their capital back. There are competing legal views on the return of funds from Ponzi schemes. Senior advocates say investors in Ponzi schemes have no right of recovery because the courts are not obliged to enforce transactions that are illegal in the first place, and investors should have transacted with companies registered with the SEC. Recovered funds are also often incommensurate with the total amounts invested.
The SEC and other regulatory authorities must drive a nationwide campaign to promote financial literacy, which is lacking among both educated and uneducated people.
While the SEC often issues warnings against Ponzi schemes, it fails to offer timely responses. The SEC must prioritise early action by working with banks and fintechs, along with other regulatory bodies such as the Nigerian Financial Intelligence Unit, Nigeria Deposit Insurance Corporation and Economic and Financial Crimes Commission. Together, they should investigate the high volumes of transactions on multiple accounts operated by these schemes to nip them in the bud.
Ndubuisi Christian Ani, Senior Researcher and Project Coordinator, ENACT, ISS
Image: © Reuters
